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The Fourth Lesson of Joe Flom

It has something to do with liquidity

Published in 2010 New York Metro Super Lawyers — September 2010 by Erik Lundegaard

In 1948, Joseph Flom joined the fledgling firm Skadden, Arps as its first associate. Thirty years later, a headline in The American Lawyer read: “Flom Firm Takes Over as Top Money Maker in ’78,” with a sketch of Flom inside a dollar bill above the banner, “In Flom We Trust.” Skadden, the “Flom Firm,” is now one of the biggest and most powerful law firms in the world, and Flom and his firm have been the subject of numerous books, including Lincoln Caplan’s Skadden: Power, Money, and the Rise of a Legal Empire, Brett Cole’s M&A Titans, and, most recently, a chapter in Malcolm Gladwell’s Outliers: The Story of Success. He spoke with us this spring.

What’s been the reaction to the chapter in the Gladwell book, “The Three Lessons of Joe Flom”?

Everybody’s had a positive reaction to it. I certainly have no complaints.

Did you think Gladwell was reducing your life to a sociological generalization? I.e., “Flom was successful because he was A, B and C”?

Not really. I didn’t read it with that kind of analysis in mind. I just read it to see if there was anything in it that was wrong. I didn’t see anything negative in it, so as far as I was concerned that was fine.

How did the Gladwell chapter come about?

He came up to interview me. I get interviewed all the time—like with you. I spent about four hours with him.

He quotes you saying “I’ve wanted to be a lawyer since I was 6 years old.” What drew you to the law?

You’ve got first-generation parents, you’re going to be a doctor or a lawyer. That was the big thing.

Any other reason? Were you an argumentative kid? A tough kid?

Oh, I wasn’t a tough kid at all. A sort of fat, ungainly kid. But I just felt a natural inclination to do it. I read a few books that got me going.

Which books?

Like Clarence Darrow for the Defense. In high school, my senior book review was on [Lawrence Boyd] Evans’ Cases in Constitutional Law.

You graduated law school in 1948. What do you remember about the job interviews?

Again, I had no social graces. I was a very heavy kid. And when I got through the interview process I didn’t feel I wanted to go with a big firm. At that time, you’ve got to remember, a big firm was 50 or 60 lawyers. A few months later, the placement office—I guess they were embarrassed [that I hadn’t been placed]—told me of these young guys starting up a firm and would I go interview with them? Which I did. They spent the whole lunch telling me about the risks of going with a startup firm with no clients. And the more they talked the more I liked them. So that’s where I made my bet.

Anything in particular about why you were drawn to these guys?

You have a two- or three-hour conversation and you either like the cut of their jib or you don’t.

How did the practice of law differ from your ideal of the law?

It was totally different because, as I said, they didn’t have any clients. So they had to go out and do odd jobs to make the money to pay my salary—$3,600 a year.

When Les Arps went out and became general counsel to the [NY State] Crime Commission, for a while I had to do the litigation. And then Charlie Lyon went off to do tax work so I had to become a tax expert. And you name it. That was great training for me.

Do you remember your first mergers and acquisition case?

Sure. General Industrial Corporation. In ’55 or ’56.

What was the case about?

It was a proxy contest and Marty Lipton was on the other side.

Did something click for you or was it just another case?

It was like a duck taking to water. I loved it. It was also an area where the large firms wouldn’t bother getting involved with so I had the field to myself. There was only one other lawyer, basically, specializing in this area at the time.

Which lawyer?

George Demas. He was by himself. Basically a single practitioner.

Any special reason you took to M&A like a duck to water?

No special reason. I enjoyed the fact that you had to be a little bit of a PR person, a little bit of an accountant, a little bit of a banker. All those things. It just worked for me and it was off to the races.

So what was a proxy contest like? The way some writers describe it, with “the pit” and all, it almost seems like a bare-knuckle brawl.

They were bare-knuckled affairs, that’s for sure.

How?

Going to the stockholders, trying to convince each one. Back then, the majority of shares were held by individuals, and you were basically trying to convince the individuals to vote for you, and every letter could revoke the previous proxy.

Was it your job to help the stockholders vote one way or the other?

I helped with the designing of the literature. At that time, I had to get the literature cleared by the FCC before it was sent out. And I had to keep track with the other people in the company: how the votes were going, what arguments were prevailing. Whatever things one might do, including a lot of litigation.

What would surprise a young M&A lawyer today about the way proxy contests were handled back then?

Well, in the ’50s and ’60s, they were handled basically by the lawyers. Bankers were [only] collaterally involved. At that time, also, there was a greater deal of propaganda [negative press] involved in it.

I’ve read that you pioneered a lot of strategies that M&A lawyers use today. What were they?

I can’t give you chapter and verse but I think the statement is accurate.

Any strategy stick out—where you thought, “Well, this will work in this particular case”?

You have to know more about an individual case, and you have to know the dynamics of it, to be able to say why something was great or wasn’t great. I figure I get paid for doing a job, and then I go on to the next one.

Some have traced the M&A boom back to 1974 and the acquisition of Electric Storage Battery Company (ESB) by International Nickel Company of Canada (INCO) and Morgan Stanley.

ESB and INCO was the first time you had real establishment companies getting involved in hostile takeovers. I worked on that with Morgan Stanley.

Did it feel like a shift to you?

It was a major shift. You’ve got to know that at that time the investment banking world was in turmoil. Fixed fees had gone by, there wasn’t a helluva lot of underwriting business floating around. And when they got involved in this and it turned out to be successful, all of a sudden everybody said, “Hey, here’s another way to make money.”

I understand you’re also involved in preventing hostile takeovers.

I’ll represent either side, whoever’s paying my bills.

Was there ever a time when you thought that this industry you helped create, hostile takeovers, was getting out of hand?

Sure. I felt that. I actually went down to talk to people in Washington about it. At that time everybody thought the sky was falling. It was a time when [hostiles] were also looked upon as negative things in many respects. But overall I felt they were good things.

Who did you talk to?

It was just informal. I can’t even remember who at the White House. I just remember we were talking about the need for positional regulation.

When was this?

1968 or ’67.

But the bigger boom occurred after that, right? Didn’t they enact any legislation back then?

Look at the history of hostile takeovers. Go back to 1896. I did a study of that. In fact, I gave a lecture at Oxford on it, and an updated lecture at Miami law school, who published the lecture.

If you look at the merger waves, every one started sensibly, got to extremes because of the way that financial world played it, and collapsed. And everyone at that point put all kinds of laws on the books to restrict them. But the next wave was always bigger than the one before.

Basically there’s one common factor that determines whether or not there’s going to be a lot of takeovers, and that’s liquidity. Whenever you had liquidity you had a lot of takeover activity. When the markets were not taking your stock, when cash was not available from loans, you had a restriction on liquidity and a consequent restriction on takeover activity.

So even with tougher restrictions, hostiles come back stronger? Why?

I’m telling you—the single factor that counts is liquidity. [The laws] are on the books and people figure out how to live with them. I can remember, in 1967, when they passed the Williams bill, saying you had to give 10 days notice in connection with a takeover. Everyone said that’s going to kill all the takeovers. It turned out to be quite the reverse. Now you have much longer restriction periods. Doesn’t make a damn bit of difference.

The fact that they have the laws on the books actually makes people feel comfortable. There’s a guideline: Here’s the way you go do a nonconsensual [takeover].

The biggest difference today, I guess, is that hostiles, now nonconsensuals, are accepted as perfectly normal business practice. I can remember a time when if you’d taken a survey at the business roundtable, two-thirds, three-quarters would say, “Hostiles should be banned. They’re bad ideas.” Today, almost every major corporation—the white-shoe, old, establishment companies—have done a hostile, and don’t regard any of it with opprobrium anymore.

What’s the reason for the turnaround in perception?

They work.

You look at the way newspapers cover them today, they cover them quite differently than they used to. Here it is, this is what the numbers are on the table. You don’t have the same kind of propaganda effect. I lived through periods when they would burn the people making the offer in effigy on the statehouse steps. You don’t see that anymore.

Are M&As coming back after the global financial meltdown?

They’re coming back very strongly.

Skadden is now one of the biggest law firms in the country but back in ’48 you guys were small and hungry. Is there—

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